Monthly Archives: July 2011

Beginning July 1, 2011, the 0.2% Federal unemployment tax (FUTA) surtax is no longer in effect. Thus, the FUTA tax rate, before consideration of state unemployment tax credits, is now 6.0%.

Background.

Under Code Sec. 3301(1), the 0.2% FUTA surtax expired on June 30, 2011. The surtax was part of the 6.2% gross unemployment tax rate (before state credit) that employers paid on the first $7,000 of wages paid annually to each employee (6% permanent tax rate, 0.2% temporary surtax). The surtax has been in effect in every year since 1976, when it was enacted by Congress on a temporary basis. Since legislation hasn’t been enacted to extend the surtax, the FUTA tax rate, before consideration of state unemployment tax credits, now drops to 6.0%, effective July 1, 2011.

So what does this mean for employers?

As IRS noted on its June 2, 2011 payroll industry conference call, employers need to separately track FUTA taxable wages paid before July 1, 2011 and FUTA taxable wages paid after June 30, 2011 since the FUTA tax rates are different during those two periods. Employers whose FUTA tax is more than $500 for the calendar year need to make quarterly FUTA deposits. The next quarterly payment is due on August 1, 2011, but that payment is based on taxable wages earned through June 30, 2011, so it will be computed using the 6.2% FUTA tax rate. However, the payment after that is due on October 31, 2011, and it will be computed using the 6.0% FUTA tax rate if legislation is not enacted to retroactively reinstate the FUTA surtax beginning July 1, 2011.

IRS has indicated it would have some mechanism in place under which an employer would not be assessed deposit penalties if it computed its unemployment tax deposits at a 6.0% rate, and legislation was enacted to retroactively reinstate the surtax. IRS is working on revising Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, to take into account the elimination of the surtax. That return must be filed in January 2012.

The effective tax rate for the Federal Employment Taxes (“FUTA”) was reduced from .8% (.008) to .6% (.006) on July 1, 2011. Congress has announced that the FUTA .2% surcharge, first enacted in 1977, will not be extended after June 30, 2011. Employers have been required to pay a flat rate of .8% on the first $7,000.00 of each employee’s annual wages for FUTA.

The IRS is currently revising Form 940 (Employer’s Annual Federal Unemployment (FUTA) Tax Return) to accommodate the two different FUTA rates for calendar year 2011.

The Internal Revenue Service recently announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes.

The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through December 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51. In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.

While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.

The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

The IRS has released the 2010 version of Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan, which some plans must file by July 31, 2011. The new form reflects a new type of pension plan that first became available in 2010. It also reflects some changed administrative practices. While they generally were first implemented last year, they are worth noting for plans first having to file Form 5500-EZ for 2010.

Purpose of Form.

Form 5500-EZ is used by one-participant plans that are not subject to the requirements of section 104(a) of the Employee Retirement Income Security Act of 1974 (ERISA) and that are not eligible or choose not to file Form 5500-SF electronically to satisfy certain annual reporting and filing obligations imposed by the Code.

The instructions stress that a one-participant plan (see below) cannot file an annual return on Form 5500, Annual Return/Report of Employee Benefit Plan, regardless of whether the plan was previously required to file an annual return on Form 5500. Therefore, every one-participant plan required to file an annual return must file paper Form 5500-EZ with IRS or choose, if eligible, to electronically file Form 5500-SF (Short Form Annual Return/Report of Small Employee Benefit Plan) using the EFAST2 Filing System (an all-electronic system designed by the Department of Labor, IRS, and Pension Benefit Guaranty Corporation to simplify and expedite the submission, receipt, and processing of Forms 5500 and 5500-SF).

Who Must File Form 5500-EZ.

Form 5500-EZ must be filed for a retirement plan if:

… it is a one-participant plan that is required to file an annual return and the taxpayer is not eligible or chooses not to file the annual return electronically on Form 5500-SF; or

… it is a foreign plan that is required to file an annual return.

A one-participant plan is a retirement plan other than an Employee Stock Ownership Plan (ESOP), which:

… covers only the taxpayer (or the taxpayer and his spouse) and the taxpayer (or the taxpayer and his spouse) owns the entire business (which may be incorporated or unincorporated); or

… covers only one or more partners (or partners and their spouses) in a business partnership; and

… does not provide benefits for anyone except the taxpayer (or the taxpayer and his spouse) or one or more partners (or partners and their spouses).

Who May Not Have to File Form 5500-EZ.

Form 5500-EZ does not have to be filed for the 2010 plan year for a one-participant plan if the total of the plan’s assets and the assets of all other one-participant plans maintained by the employer at the end of the 2010 plan year does not exceed $250,000, unless 2010 is the final plan year of the plan. If a plan meets all the requirements for filing Form 5500-EZ and its total assets exceed $250,000 at the end of the 2010 plan year, Form 5500-EZ must be filed for each of the employer’s one-participant plans including those with less than $250,000 in assets for the 2010 plan year.

EFAST2 Filing System.

One-participant plans may satisfy their filing obligation by filing Form 5500-SF electronically under EFAST2 in place of Form 5500-EZ (on paper), provided that the plan covered fewer than 100 participants at the beginning of the plan year. One-participant plans that covered 100 or more participants at the beginning of the plan year are not eligible to file Form 5500-SF, and must file Form 5500-EZ.

Final Plan Year.

All one-participant plans should file the Form 5500-EZ for their final plan year indicating that all assets have been distributed. The final plan year is the year in which distribution of all plan assets is completed.

Filing Due Date.

Form 5500-EZ must be filed by the last day of the seventh month following the end of the plan year (e.g., normally July 31 for calendar year plans but Aug. 1, 2011 for 2010 calendar years plans because July 31, 2011 falls on a Sunday) unless an extension is granted. A one-time extension to file Form 5500-EZ of up to 2 1/2 months may be obtained by filing Form 5558.

One-participant plans automatically receive an extension of time to file Form 5500-EZ (without filing a Form 5558) if the following conditions are met:

… the plan year and the employer’s tax year are the same;

… the employer has been granted an extension to file its federal income tax return to a date later than the normal due date for filing the Form 5500-EZ; and

… a copy of the application for extension of time to file the federal income tax return is retained with the plan’s records..

This exception gives an extension to the extended due date for filing the employer’s income tax return.